Interpipe might face Russian embargo on railway product sales

Russia’s transport ministry is considering prohibiting
imports of railway wheels from Ukraine, the rbc.ru news site reported on Oct.
6, citing its anonymous sources. The prohibition could be introduced by the end of 2020, according to the sources.

Recall, Russia reinstated a 34.22% duty
on imports of railway products from Ukraine starting June 2. The duty was temporarily suspended
in August 2019.  

Dmytro Khoroshun: We do not
rule out Russia adding railway products to its list of goods under embargo for
imports from Ukraine. If this happens, it will be substantially negative for
Interpipe, which sold 60.4 kt of its railway products, or 30% of its total
sales volume, to Russia in 2019.

Following the recent plunge in railway product prices,
the EBITDA of Interpipe’s railway product segment (before reallocation of steel
segment EBITDA) dropped to USD 900 per ton of railway products sold in 2Q20
from USD 1,200/t in 1Q20. We expect it to fall further, possibly to as low as
USD 500-700/t in 2H20, and possibly for some time in 2021, noting that this will
be still substantially above the USD 170-200/t EBITDA range demonstrated by
Interpipe in 2016-2018.

Using the USD 500-700/t range for EBITDA, we
estimate that the complete loss of 60 kt of railway product sales will result
in a loss of USD 30-42 mln of EBITDA for Interpipe. However, in this scenario
the company should be able to offset some of the volumes it sells to Russia by
expanding at other markets, particularly in Europe.